Direct Line Insurance Group (LON:DLG) Is Increasing Its Dividend To UK£0.15

By
Simply Wall St
Published
March 26, 2022
LSE:DLG
Source: Shutterstock

Direct Line Insurance Group plc (LON:DLG) will increase its dividend on the 17th of May to UK£0.15. This takes the dividend yield from 8.3% to 8.3%, which shareholders will be pleased with.

See our latest analysis for Direct Line Insurance Group

Direct Line Insurance Group's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last payment made up 93% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

EPS is set to grow by 11.2% over the next year. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 86%, which is on the higher side, but certainly still feasible.

historic-dividend
LSE:DLG Historic Dividend March 26th 2022

Direct Line Insurance Group's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2013, the dividend has gone from UK£0.087 to UK£0.23. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings have grown at around 4.1% a year for the past five years, which isn't massive but still better than seeing them shrink. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

Our Thoughts On Direct Line Insurance Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think Direct Line Insurance Group will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Direct Line Insurance Group that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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